<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ --------------
COMMISSION FILE NUMBER: 33-42337
CAPSTEAD SECURITIES CORPORATION IV
(Exact name of Registrant as specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 75-2390594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVENUE 75204
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (214) 874-2323
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ]
AT MARCH 31, 1998 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS: NOT APPLICABLE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1)(a)
AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 20, 1998: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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<PAGE> 2
CAPSTEAD SECURITIES CORPORATION IV
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
ITEM 1. BUSINESS.......................................................................... 1
ITEM 2. PROPERTIES........................................................................ 2
ITEM 3. LEGAL PROCEEDINGS................................................................. 2
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................................ 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................... 4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................................ 16
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
ORGANIZATION
Capstead Securities Corporation IV (the "Company") was incorporated in Delaware
on August 16, 1991 as a special-purpose finance corporation and is a
wholly-owned subsidiary of Capstead Mortgage Corporation ("CMC"). CMC is a
publicly owned real estate investment trust that, until late 1995, operated a
mortgage conduit, purchasing and securitizing single-family residential mortgage
loans. The Company is managed by CMC (the "Manager"). The Company believes it
has qualified as a REIT subsidiary of CMC under the Internal Revenue Code of
1986 (the "Code"); therefore, for federal income tax purposes it is combined
with CMC. Under applicable sections of the Code, REITs are required to
distribute annually to stockholders at least 95% of their taxable income. It is
the Company's and CMC's policy to distribute 100% of combined taxable income.
The Company was formed and exists solely for the purpose of issuing and selling
collateralized mortgage obligations ("CMOs"), collateralized by mortgage-backed,
pass-through certificates ("Certificates") which evidence an interest in a pool
of mortgage loans secured by single-family residences. The Certificates pledged
as collateral for the CMOs are either contributed by CMC or purchased from third
parties and are either Government National Mortgage Association Certificates,
Federal National Mortgage Association Certificates, Federal Home Loan Mortgage
Corporation Certificates or mortgage pass-through ("Non-Agency") Certificates.
On August 21, 1991 the Securities and Exchange Commission declared effective a
registration statement filed by the Company covering the offering of a maximum
of $5 billion aggregate principal amount of CMOs. As of December 31, 1997, the
Company has issued 18 series of CMOs with an aggregate original principal
balance of $4,226,812,000.
SPECIAL-PURPOSE FINANCE CORPORATION
The Company has not engaged, and will not engage in any business or investment
activities other than (i) issuing and selling CMOs and receiving, owning,
holding and pledging as collateral the related Certificates; (ii) investing cash
balances on an interim basis in high quality short-term securities; and (iii)
engaging in other activities which are necessary or expedient to accomplish the
foregoing and are incidental thereto.
COMPETITION
In issuing CMOs, the Company competes with other issuers of these securities and
the securities themselves compete with other investment opportunities available
to prospective purchasers.
EMPLOYEES
At December 31, 1997 the Company had no employees. The Manager provides all
executive and administrative personnel required by the Company.
-1-
<PAGE> 4
MANAGEMENT AGREEMENT
Pursuant to a Management Agreement, the Manager advises the Company with respect
to its investments and administers the day-to-day operations of the Company. The
Management Agreement is nonassignable except by consent of the Company and the
Manager. The Management Agreement may be terminated without cause at any time
upon 90 days written notice. In addition, the Company has the right to terminate
the Management Agreement upon the happening of certain specified events,
including a breach by the Manager of any provision contained in the Management
Agreement which remains uncured for 30 days after notice of such breach and the
bankruptcy or insolvency of the Manager.
The Manager is at all times subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company delegates to
it. The Manager is responsible for the day-to-day operations of the Company and
performs such services and activities relating to the assets and operations of
the Company as may be appropriate. The Manager receives an annual basic
management fee of $10,000 per year for managing the assets pledged to secure
Bonds issued by the Company.
The Manager is required to pay employment expenses of its personnel (including
salaries, wages, payroll taxes, insurance, fidelity bonds, temporary help and
cost of employee benefit plans), and other office expenses, travel and other
expenses of directors, officers and employees of the Manager, accounting fees
and expenses incurred in supervising and monitoring the Company's investments.
The Company is required to pay all other expenses of operation (as defined in
the Management Agreement).
SERVICING AND ADMINISTRATION
The originators of mortgage loans backing Non-Agency Certificates either service
the loans themselves or sell the loans with no agreement with respect to
servicing, in which event Capstead Inc., a subsidiary of CMC, may act as
servicer. The Company enters into servicing agreements with each servicer. The
terms and conditions of servicing agreements with Capstead Inc. are
substantially the same as those contained in servicing agreements with unrelated
third parties.
As compensation for its services under a servicing agreement, the servicers
retain a servicing fee, payable monthly, generally 1/4 of 1% of the outstanding
principal balance of each mortgage loan serviced as of the last day of each
month. In addition, CMC can act as administrator with respect to the Company's
Non-Agency Certificates. CMC does not currently service or act as administrator
with respect to CMOs issued by the Company.
ITEM 2. PROPERTIES.
The Company's operations are conducted primarily in Dallas, Texas on properties
leased by CMC.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, there are no material legal proceedings outside the
normal course of business to which the Company was a party or of which any of
its property was the subject.
-2-
<PAGE> 5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's common stock is owned by CMC. Accordingly, there is no
public trading market for its common stock. The Company paid no dividends during
1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1997 COMPARED TO 1996
Residual investments in collateralized mortgage obligations (represented by the
difference between the carrying value of mortgage securities collateral and
collateralized mortgage securities on the balance sheet; also referred to as
"CMO Investments") earned $1,150,000 in 1997, compared to $2,238,000 in 1996.
Operating results produced by CMO Investments is represented by the difference
between interest income on mortgage securities collateral and interest expense
and professional fees on collateralized mortgage securities and mortgage pool
insurance expense on mortgage securities collateral.
Operating results from CMO Investments declined in 1997 compared to 1996 due
primarily to the impact of run-off (prepayments and scheduled payments) and the
redemptions of CMO Series 1992-VI, 1992-VIII and 1992-XIV on the average
holdings of mortgage securities collateral. Average holdings of mortgage
securities collateral were $619 million during 1997 compared to $941 million
during 1996. As a result of this 34% decrease in the outstanding balance, income
earned from the net interest spreads was lower in the current year.
The following table presents the weighted average yields for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage securities collateral 8.47% 8.51%
Collateralized mortgage securities 8.17 8.09
---- ----
Net interest spread 0.30% 0.42%
==== ====
</TABLE>
Although net interest spreads can fluctuate depending on the timing of the
payoff of collateral and bonds with different amounts of purchase premium and
bond discounts, the tendency is for CMO net interest spreads to decline as
lower-yielding, shorter-term CMO bonds are paid off prior to longer-term bonds
with relatively higher interest rates.
During 1997 the Company redeemed the remaining outstanding bonds of Series
1992-VI, 1992-VIII and 1992-XIV totaling $136,678,000 and sold the related
released collateral of $134,339,000 for gains totaling $3,386,000.
1996 COMPARED TO 1995
Residual investments in collateralized mortgage obligations (represented by the
difference between the carrying value of mortgage securities collateral and
collateralized mortgage securities on the balance sheet; also referred to as
"CMO Investments") earned $2,238,000 in 1996, compared to $3,416,000 in
-3-
<PAGE> 6
1995. Operating results produced by CMO Investments is represented by the
difference between interest income on mortgage securities collateral and
interest expense and professional fees on collateralized mortgage securities and
mortgage pool insurance expense on mortgage securities collateral.
Operating results from CMO Investments declined in 1996 compared to 1995 due
primarily to the impact of run-off (prepayments and scheduled payments) and the
redemption of CMO Series 1991-VIII, 1992-III and 1992-IX on the average holdings
of mortgage securities collateral. Average holdings of mortgage securities
collateral were $941 million during 1996 compared to approximately $1.2 billion
during 1995. As a result of this lower outstanding balance, income earned from
the net interest spreads was lower in the current year. Run-off rates were 20%
during 1996 compared to 18% during 1995.
More than offsetting the 1996 decline in earnings on CMO Investments was
$2,460,000 of gains from sales to CMC of collateral released from the related
CMOs. The following table presents the weighted average yields for the periods
shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995
---- ----
<S> <C> <C>
Mortgage securities collateral 8.51% 8.50%
Collateralized mortgage securities 8.09 8.03
---- ----
Net interest spread 0.42% 0.47%
==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the receipt of excess cash flows on
CMOs (primarily the excess of principal and interest earned on the mortgage
securities collateral including reinvestment proceeds over the principal and
interest payable on the CMOs), proceeds from additional CMO issuances, and
occasionally proceeds from the sale of collateral released from the related
CMOs. There have been no CMO issuances since January 1993. Net income and excess
cash flows from CMO Investments have allowed a dividend of $1,556,000 during
1997 and the return of $8,724,000 and $6,099,000 of capital during 1997 and
1996, respectively. The Company continues to qualify as a real estate investment
trust subsidiary.
IMPACT OF YEAR 2000
Many existing computer software programs use only two digits to identify the
year in date fields and, as such, could fail or create erroneous results by or
at the Year 2000. The Manager utilizes a number of software systems to service
mortgage loans, and manage the Company's affairs. The Manager has made and will
continue to make investments in its software systems and applications to ensure
the Company is Year 2000 compliant. In addition, the Manager has taken steps to
ensure that the vendors it utilizes in various capacities and institutions that
it interfaces with are also taking the necessary steps to become Year 2000
compliant. This process is expected to be essentially complete by mid-1998. The
financial impact of becoming Year 2000 compliant has not been and is not
expected to be material to the Company or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-4-
<PAGE> 7
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Stockholder and Board of Directors
Capstead Securities Corporation IV
We have audited the accompanying balance sheet of Capstead Securities
Corporation IV (a wholly-owned subsidiary of Capstead Mortgage Corporation) as
of December 31, 1997 and 1996, and related statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capstead Securities Corporation
IV at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Dallas, Texas
March 20, 1998
-5-
<PAGE> 8
CAPSTEAD SECURITIES CORPORATION IV
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 493,147 $ 766,812
Cash and cash equivalents 8 2,675
Other assets 1,508 2,493
--------- ---------
$ 494,663 $ 771,980
========= =========
LIABILITIES
Collateralized mortgage securities $ 485,633 $ 754,631
Accrued expenses 40 30
--------- ---------
485,673 754,661
--------- ---------
STOCKHOLDER'S EQUITY
Common stock - $1 par value,
1,000 shares authorized,
issued and outstanding 1 1
Paid-in capital 8,989 17,713
Unrealized gain on debt securities -- 2,646
Accumulated deficit -- (3,041)
--------- ---------
8,990 17,319
--------- ---------
$ 494,663 $ 771,980
========= =========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE> 9
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Mortgage securities collateral $ 52,411 $ 80,079 $103,457
Receivable from Parent 71 32 29
-------- -------- --------
Total interest income 52,482 80,111 103,486
Interest expense on collateralized
mortgage securities 49,544 74,842 96,202
-------- -------- --------
Net interest income 2,938 5,269 7,284
-------- -------- --------
Other income - gains on sale of
released mortgage securities
collateral 3,386 2,460 --
-------- -------- --------
Other expenses:
Management fees 10 10 10
Professional fees and other 104 128 134
Pool insurance 1,613 2,871 3,705
-------- -------- --------
Total other expenses 1,727 3,009 3,849
-------- -------- --------
Net income $ 4,597 $ 4,720 $ 3,435
======== ======== ========
Net income per share $ 4,597 $ 4,720 $ 3,435
Number of shares outstanding 1,000 1,000 1,000
Cash dividends paid per share $ 1,556 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 10
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF STOCKHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
--------------------- PAID-IN ACCUMULATED GAIN ON DEBT
SHARES AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
-------- -------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 1 $ 1 $ 29,383 $(11,196) $ -- $ 18,188
Capital distributions -- -- (5,571) -- -- (5,571)
Unrealized gain on
debt securities -- -- -- -- 3,259 3,259
Net income -- -- -- 3,435 -- 3,435
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1995 1 1 23,812 (7,761) 3,259 19,311
Capital distributions -- -- (6,099) -- -- (6,099)
Unrealized loss
on debt securities -- -- -- -- (613) (613)
Net income -- -- -- 4,720 -- 4,720
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1996 1 1 17,713 (3,041) 2,646 17,319
Capital distributions -- -- (8,724) -- -- (8,724)
Unrealized loss
on debt securities -- -- -- -- (2,646) (2,646)
Net income -- -- -- 4,597 -- 4,597
Dividends paid -- -- -- (1,556) -- (1,556)
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1997 1 $ 1 $ 8,989 $ -- $ -- $ 8,990
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 11
CAPSTEAD SECURITIES CORPORATION IV
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,597 $ 4,720 $ 3,435
Noncash item - amortization of discount
and premium 772 845 808
Net change in other assets and accrued expenses 995 1,021 979
Gain on sale of released mortgage
securities collateral (3,386) (2,460) --
--------- --------- ---------
Net cash provided
by operating activities 2,978 4,126 5,222
--------- --------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 138,618 216,606 234,293
Decrease in accrued interest receivable 1,911 2,480 1,438
Decrease (increase) in short-term investments (4,502) 8,568 (257)
Sale of released mortgage securities collateral 137,725 109,241 --
--------- --------- ---------
Net cash provided
by investing activities 273,752 336,895 235,474
--------- --------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (266,508) (329,694) (232,691)
Decrease in accrued interest payable (2,609) (3,022) (1,989)
Capital distributions (8,724) (6,099) (5,571)
Dividends paid (1,556) -- --
--------- --------- ---------
Net cash used by
financing activities (279,397) (338,815) (240,251)
--------- --------- ---------
Net change in cash and cash equivalents (2,667) 2,206 445
Cash and cash equivalents at
beginning of year 2,675 469 24
--------- --------- ---------
Cash and cash equivalents at
end of year $ 8 $ 2,675 $ 469
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
CAPSTEAD SECURITIES CORPORATION IV
DECEMBER 31, 1997
NOTE A -- BASIS OF PRESENTATION
Capstead Securities Corporation IV (the "Company"), was incorporated in Delaware
on August 16, 1991 as a special-purpose finance corporation primarily to issue
bonds collateralized by whole loans or mortgage-backed securities. The Company
is a wholly-owned subsidiary of Capstead Mortgage Corporation ("CMC"), which
commenced operations with the issuance of its first collateralized mortgage
obligation ("CMO") on December 23, 1991.
NOTE B -- ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
amortization of premiums and discounts on mortgage securities collateral and
collateralized mortgage securities is based on expectations of future movements
in interest rates and how resulting rates will impact prepayments on underlying
mortgage loans. It is possible that prepayments could rise to levels that would
adversely affect profitability if such levels are sustained for more than a
brief period of time.
DEBT SECURITIES
Mortgage securities collateral held in the form of mortgage-backed securities
are debt securities. Management determines the appropriate classification of
debt securities at the time of purchase or securitization and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses, net of tax, reported as a separate component of
stockholder's equity.
Amortized cost is adjusted for amortization of premiums and discounts over the
estimated life of the security using the interest method. Such amortization is
included in related interest income.
Mortgage securities collateral is subject to changes in value because of changes
in interest rates and rates of prepayment, as well as failure of the mortgagor
to perform under the mortgage agreement. The Company has limited its exposure to
these risks by issuing collateralized mortgage securities, acquiring mortgage
pool and special hazard insurance, and simultaneously selling collateral
released from indentures upon redemption of the related bonds.
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<PAGE> 13
ALLOWANCE FOR POSSIBLE LOSSES
The Company provides for possible losses on its investments in amounts which it
believes are adequate relative to the risk inherent in such investments. The
Company does not provide for losses resulting from covered defaults on
investments with mortgage pool insurance and special hazard insurance (see Note
F).
COLLATERALIZED MORTGAGE SECURITIES
Collateralized mortgage securities are carried at their unpaid principal
balances, net of unamortized discount or premium. Any discount or premium is
recognized as an adjustment to interest expense by the interest method over the
life of the related securities.
INCOME TAXES
The Company believes it has qualified as a real estate investment trust ("REIT")
subsidiary of CMC under the Internal Revenue Code of 1986 (the "Code"), and for
federal income tax purposes is combined with CMC. Under applicable sections of
the Code, a REIT is required to meet certain asset, income and stock ownership
requirements as well as distribute at least 95% of its taxable income, the
distribution of which may extend into the subsequent taxable year. It is the
Company's policy to distribute 100% of taxable income within the time limits
prescribed by the Code. Accordingly, no provision has been made for federal
income taxes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less.
NOTE C -- MORTGAGE SECURITIES COLLATERAL
Mortgage securities collateral consists of conventional single-family mortgage
loans that are pledged to secure repayment of the collateralized mortgage
securities. All principal and interest payments on the collateral are remitted
directly to a collection account maintained by a trustee. The trustee is
responsible for reinvesting those funds in short-term investments. All
collections on the collateral and the reinvestment income earned thereon is
available for payment of principal and interest on the collateralized mortgage
securities.
The components of mortgage securities collateral are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Mortgage collateral $474,194 $747,127
Short-term investments 14,682 10,180
Accrued interest receivable 3,427 5,338
-------- --------
Total collateral 492,303 762,645
Unamortized premium 844 1,521
Unrealized gain on debt securities
held available-for-sale -- 2,646
-------- --------
Net collateral $493,147 $766,812
======== ========
</TABLE>
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<PAGE> 14
The weighted average effective interest rate for mortgage securities collateral
was 8.47% and 8.51% during 1997 and 1996, respectively.
In connection with the 1997 redemptions of Series 1992-VI, 1992-VIII and
1992-XIV pursuant to clean-up calls (see Note D), the Company sold to CMC
mortgage loans released from the related indentures totaling $134,339,000 for
gains totaling $3,386,000.
NOTE D -- COLLATERALIZED MORTGAGE SECURITIES
Each series of collateralized mortgage securities consists of various classes,
some of which may be deferred interest securities. Substantially all classes of
bonds are at a fixed rate of interest. Interest is payable quarterly or monthly
at specified rates for all classes other than the deferred interest securities.
Generally, principal payments on each series are made to each class in the order
of their stated maturities so that no payment of principal will be made on any
class until all classes having an earlier stated maturity have been paid in
full. Generally, payments of principal and interest on the deferred interest
securities will commence only upon payment in full of all other classes. Prior
to that time, interest accrues on the deferred interest securities and the
amount accrued is added to the unpaid principal balance.
The components of collateralized mortgage securities are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1997 1996
------ ------
<S> <C> <C>
Collateralized mortgage securities $483,385 $749,893
Accrued interest payable 5,991 8,600
-------- --------
Total obligation 489,376 758,493
Unamortized discount (3,743) (3,862)
-------- --------
Net obligation $485,633 $754,631
======== ========
Range of average interest rates 7.60% to 8.90% 7.21% to 8.90%
Range of stated maturities 2007 to 2023 2007 to 2023
Number of series 10 13
</TABLE>
The maturity of each series of securities is directly affected by the rate of
principal prepayments on the related mortgage securities collateral. Each series
of securities is also subject to redemption at the Company's option provided
that certain requirements specified in the related indenture have been met
(referred to as "clean-up calls"). As a result, the actual maturity of any
series of securities is likely to occur earlier than its stated maturity. In
1997, the Company redeemed the remaining outstanding bonds of three series of
collateralized mortgage securities (Series 1992-VI, 1992-VIII and 1992-XIV)
totaling $136,678,000 pursuant to clean-up calls.
The weighted average effective interest rate for all collateralized mortgage
securities was 8.17% and 8.09% during 1997 and 1996, respectively. Interest
payments on collateralized mortgage securities of $51,577,000, $77,592,000, and
$97,981,000 were made during 1997, 1996, and 1995, respectively.
-12-
<PAGE> 15
NOTE E -- DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies; however, considerable judgment is required in interpreting market
data to develop these estimates. In addition, fair values fluctuate on a daily
basis. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying amount of cash and cash equivalents approximates fair value. The
fair value of mortgage securities collateral was estimated using either quoted
market prices, when available, including quotes made by CMC's lenders in
connection with designating collateral for repurchase arrangements. The fair
value of collateralized mortgage securities is dependent upon the
characteristics of the mortgage securities collateral pledged to secure the
issuance; therefore, fair value was based on the same method used for
determining fair value for the underlying mortgage securities collateral,
adjusted for credit enhancements.
The following table summarizes the fair value of financial instruments (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 8 $ 8 $ 2,675 $ 2,675
Mortgage securities collateral 493,147 506,269 766,812 780,933
LIABILITIES
Collateralized mortgage
securities 485,633 501,465 754,631 769,608
</TABLE>
The following table summarizes fair value disclosures for mortgage securities
collateral held available-for-sale and held-to-maturity (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Held-to-maturity $493,147 $13,280 $158 $506,269
DECEMBER 31, 1996
Available-for-sale 81,539 2,646 -- 84,185
Held-to-maturity 682,627 14,327 206 696,748
</TABLE>
Upon the Company's redemption of remaining bonds outstanding pursuant to
clean-up calls, released CMO collateral may be sold. Such sales are deemed
maturities under the provisions of SFAS 115.
-13-
<PAGE> 16
The following table summarizes disclosures related to the disposition of
released CMO collateral held available-for-sale and held-to-maturity (in
thousands):
<TABLE>
<CAPTION>
COST BASIS GAINS
---------- -----
<S> <C> <C>
DECEMBER 31, 1997
Available-for-sale $75,901 $1,466
Held-to-maturity 58,414 1,920
DECEMBER 31, 1996
Available-for-sale 61,449 1,001
Held-to-maturity 45,077 1,459
</TABLE>
NOTE F -- ALLOWANCE FOR POSSIBLE LOSSES
The Company has limited exposure to losses on mortgage loans. Losses due to
typical mortgagor default or fraud or misrepresentation during origination of
the mortgage loan are substantially reduced by the acquisition of mortgage pool
insurance from AAA-rated mortgage pool insurers. The amount of coverage under
any such mortgage pool insurance policy is the amount (typically 10% to 12% of
the aggregate amount in such pool of mortgage loans), determined by one or more
Rating Agencies, necessary to allow the securities such pools are pledged to
secure to be rated AAA, when combined with homeowner equity or other insurance
coverage. Certain other risks, however, are not covered by mortgage pool
insurance. These risks include special hazards which are not covered by standard
hazard insurance policies. Special hazards are typically catastrophic events
that are unable to be predicted (e.g., earthquakes). The Company has limited its
exposure to special hazard losses by acquiring special hazard insurance coverage
from an insurer rated AAA. Because of its limited exposure to mortgage loan
losses, the Company has determined that an allowance for losses is not warranted
at December 31, 1997.
Since approximately 55% of the Company's mortgage loans are secured by
properties located in California, the Company has a concentration of risk
related to the California market. However, the Company's exposure arising from
this concentration is reduced by the acquisition of mortgage pool insurance and
special hazard insurance.
NOTE G -- MANAGEMENT AGREEMENT
The Company operates under a $10,000 per year management agreement with CMC (the
"Manager"). The agreement provides that the Manager will advise the Company with
respect to all facets of its business and administer the day-to-day operations
of the Company under the supervision of the Board of Directors. The Manager
pays, among other things, salaries and benefits of its personnel, accounting
fees and expenses, and other office expenses incurred in supervising and
monitoring the Company's investments.
NOTE H -- TRANSACTIONS WITH RELATED PARTY
The Company signed a $1 million revolving subordinated promissory note with CMC
under which interest accrued on amounts payable based on the annual federal
short-term rate as published by the Internal Revenue Service. This note matures
January 1, 1999. Repayments may be made as funds are available.
-14-
<PAGE> 17
On a monthly basis, the Company's excess cash is advanced to CMC for which the
Company earns interest based on the annual federal short-term rate. At the end
of each quarter, these advances are accounted for as distributions to CMC and
treated as returns of capital.
NOTE I -- NET INTEREST INCOME ANALYSIS (UNAUDITED)
The following table summarizes interest income and interest expense and the
average effective interest rate for mortgage securities collateral and
collateralized mortgage securities (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ----------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest income on $52,411 8.47% $80,079 8.51% $103,457 8.50%
mortgage securities
collateral
Interest expense on
collateralized
mortgage securities 49,544 8.17 74,842 8.09 96,202 8.03
------- ------- --------
Net interest income $ 2,867 $ 5,237 $ 7,255
======= ======= ========
</TABLE>
The following table summarizes the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1997/1996
------------------------------------
RATE VOLUME TOTAL
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ (356) $(27,312) $(27,668)
Interest expense on collateralized
mortgage securities 760 (26,058) (25,298)
-------- -------- --------
$ (1,116) $ (1,254) $ (2,370)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996/1995
------------------------------------
RATE VOLUME TOTAL
-------- -------- --------
<S> <C> <C> <C>
Interest income on mortgage
securities collateral $ 122 $(23,500) $(23,378)
Interest expense on collateralized
mortgage securities 726 (22,086) (21,360)
-------- -------- --------
$ (604) $ (1,414) $ (2,018)
======== ======== ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-15-
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following financial statements of the Company are
included in ITEM 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheet - December 31, 1997 and 1996 6
Statement of Operations - Three Years Ended
December 31, 1997 7
Statement of Stockholder's Equity - Three Years
Ended December 31, 1997 8
Statement of Cash Flows - Three Years Ended
December 31, 1997 9
Notes to Financial Statements - December 31, 1997 10
</TABLE>
2. Financial statement schedules: None.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions
or are inapplicable and, therefore, have been omitted.
3. Exhibits:
EXHIBIT
NUMBER
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Form of Indenture between the Registrant and
Texas Commerce Bank, National Association,
as Trustee(1)
4.2 Form of First Supplement to the Indenture(3)
4.3 Form of Second Supplement to the Indenture(4)
4.4 Form of Third Supplement to the Indenture(5)
4.5 Form of Fourth Supplement to the Indenture(6)
4.6 Form of Fifth Supplement to the Indenture(7)
4.7 Form of Sixth Supplement to the Indenture(7)
4.8 Form of Seventh Supplement to the Indenture(8)
4.9 Form of Eighth Supplement to the Indenture(9)
4.10 Form of Ninth Supplement to the Indenture(9)
4.11 Form of Tenth Supplement to the Indenture(10)
4.12 Form of Eleventh Supplement to the Indenture(11)
4.13 Form of Twelfth Supplement to the Indenture(10)
4.14 Form of Thirteenth Supplement to the Indenture(12)
4.15 Form of Fourteenth Supplement to the Indenture(13)
4.16 Form of Fifteenth Supplement to the Indenture(13)
4.17 Form of Sixteenth Supplement to the Indenture(14)
4.18 Form of Seventeenth Supplement to the Indenture(14)
4.19 Form of Eighteenth Supplement to the Indenture(15)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.4 Management Agreement between the Company and
Capstead Advisers, Inc. dated January 1, 1994(2)
-16-
<PAGE> 19
PART IV
ITEM 14. - CONTINUED
3. Exhibits (continued):
EXHIBIT
NUMBER
10.5 Amended Management Agreement between the Company
and Capstead Advisers, Inc. October 1, 1994(16)
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule*
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is submitted as
a separate section of this report.
- -----------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-3 (No. 33-42337) filed August 21, 1991.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 24, 1991.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 23, 1991.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 28, 1993.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on February 28, 1993.
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on March 30, 1993.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on April 30, 1993.
(9) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on May 29, 1993.
(10) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 30, 1993.
(11) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 29, 1993.
(12) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on July 30, 1993.
(13) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on August 28, 1993.
(14) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1993.
(15) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 29, 1994.
(16) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
* Filed herewith.
-17-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CAPSTEAD SECURITIES CORPORATION IV
REGISTRANT
Date: March 13, 1998 By: /s/ ANDREW F. JACOBS
-------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ RONN K. LYTLE Chairman, Chief March 13, 1998
- ------------------------------ Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President- March 13, 1998
- ------------------------------- Control, Treasurer
(Andrew F. Jacobs) and Secretary
/s/ MAURICE MCGRATH Director March 20, 1998
- -------------------------------
(Maurice McGrath)
</TABLE>
-18-
<PAGE> 21
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
<PAGE> 22
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Form of Indenture between the Registrant and
Texas Commerce Bank, National Association,
as Trustee(1)
4.2 Form of First Supplement to the Indenture(3)
4.3 Form of Second Supplement to the Indenture(4)
4.4 Form of Third Supplement to the Indenture(5)
4.5 Form of Fourth Supplement to the Indenture(6)
4.6 Form of Fifth Supplement to the Indenture(7)
4.7 Form of Sixth Supplement to the Indenture(7)
4.8 Form of Seventh Supplement to the Indenture(8)
4.9 Form of Eighth Supplement to the Indenture(9)
4.10 Form of Ninth Supplement to the Indenture(9)
4.11 Form of Tenth Supplement to the Indenture(10)
4.12 Form of Eleventh Supplement to the Indenture(11)
4.13 Form of Twelfth Supplement to the Indenture(10)
4.14 Form of Thirteenth Supplement to the Indenture(12)
4.15 Form of Fourteenth Supplement to the Indenture(13)
4.16 Form of Fifteenth Supplement to the Indenture(13)
4.17 Form of Sixteenth Supplement to the Indenture(14)
4.18 Form of Seventeenth Supplement to the Indenture(14)
4.19 Form of Eighteenth Supplement to the Indenture(15)
10.1 Form of Pooling and Administrative Agreement(1)
10.2 Form of Servicing Agreement(1)
10.4 Management Agreement between the Company and
Capstead Advisers, Inc. dated January 1, 1994(2)
10.5 Amended Management Agreement between the Company
and Capstead Advisers, Inc. October 1, 1994(16)
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule*
</TABLE>
<PAGE> 23
- -----------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-3 (No. 33-42337) filed August 21, 1991.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 24, 1991.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on December 23, 1991.
(5) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 28, 1993.
(6) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on February 28, 1993.
(7) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on March 30, 1993.
(8) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on April 30, 1993.
(9) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on May 29, 1993.
(10) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 30, 1993.
(11) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on June 29, 1993.
(12) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on July 30, 1993.
(13) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on August 28, 1993.
(14) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on September 30, 1993.
(15) Previously filed with the Commission as an exhibit to the Registrant's
Current Report on Form 8-K on January 29, 1994.
(16) Previously filed with the Commission as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
* Filed herewith.
<PAGE> 1
EXHIBIT 23
CAPSTEAD SECURITIES CORPORATION IV
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-42337) of Capstead Securities Corporation IV pertaining to the
issuance of a maximum $5 billion aggregate principal balance of collateralized
mortgage obligations and in the related prospectus and prospectus supplements of
our report dated January 21, 1998, with respect to the financial statements of
Capstead Securities Corporation IV included in this Annual Report (Form 10-K)
for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from CMC
Securities Corporation IV's Annual Report on Form 10-K for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 494,663
<CURRENT-LIABILITIES> 40
<BONDS> 485,663
0
0
<COMMON> 1
<OTHER-SE> 8,989
<TOTAL-LIABILITY-AND-EQUITY> 494,663
<SALES> 0
<TOTAL-REVENUES> 55,868
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,544
<INCOME-PRETAX> 4,597
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,597
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
